Disney+ Won Over Investors. Now It Needs to Conquer Consumers

(Bloomberg) -- When Walt Disney Co. gave a peek at its streaming platform in April, the company warned investors that earnings would suffer.

The $6.99-a-month service, Disney+, won’t be profitable until 2024 and original shows alone will add $1 billion to production costs next year, executives said.

Investors thought it was the best news they’d heard in years.

They sent the shares on the biggest rally in a decade, putting Disney in record territory. Shareholders applauded the company again last Thursday, despite Disney posting a 28% decline in earnings per share -- partly because of heavy spending on its streaming strategy.

The message from Wall Street is clear: Do whatever it takes to become a leader in streaming. And so far -- with a low-priced product, plenty of family-friendly content and a marketing blitz -- Disney seems poised to do just that.

But now it’s time to actually deliver. The Disney+ service launches in the U.S. on Nov. 12 -- chock full of content from its Marvel, Pixar and Star Wars franchises -- and the company will see how quickly it can rack up subscribers. Attracting tens of millions of customers is critical to the Burbank, California-based company, which is seeing consumers abandon traditional TV in droves.

The rest of Disney, meanwhile, is bankrolling its streaming efforts, which also include Hulu and ESPN+.

“I view the media side of the business as the cash machine to fund the new initiatives like Disney+,” said David Heger, an analyst with Edward D. Jones in St. Louis. “As long as the media business stays relatively stable, then it’s doing its job.”

The company put some final pieces in place last week for its Disney+ rollout. It reached an agreement to put the service on Amazon, Samsung and LG devices, ensuring Disney+ can reach tens of millions of additional viewers when it goes online. Disney had already signed agreements to distribute the product on devices by Apple Inc. and Roku Inc.

Amazon.com Inc., which sells the Fire TV product, had been a notable holdout as the companies argued over terms.

Quick Start?

The agreements with tech giants -- along with a promotional tie-in with Verizon Communications Inc. -- should help Disney+ get off to a fast start. Chief Executive Officer Bob Iger also said last week that Disney+ will start rolling out in Western Europe in March, sooner than many thought.

The news prompted Sanford C. Bernstein analyst Todd Juenger to predict that Disney+ could have 20 million subscribers in its first year.

The shares have gained 26% this year, outpacing the S&P 500’s 23% increase -- and the 8.9% gain of Disney’s biggest streaming rival, Netflix Inc.

But Disney has a long road ahead. The company has set a goal of attracting 60 million to 90 million subscribers for the new service in the next five years, with two-thirds of them outside the U.S. Netflix currently has more than 158 million.

Meanwhile, additional competitors are moving in. AT&T Inc. just unveiled HBO Max, a service that will go live in May. And Apple Inc. rolled out its streaming platform, TV+, earlier this month. Comcast Corp.’s NBCUniversal is formulating its own product for next year.

Analysts view Disney’s streaming operations as an asset with a long-term payoff. Vijay Jayant, an analyst with Evercore Securities, figures the company’s three big streaming businesses -- Disney+, Hulu and ESPN+ -- will generate $16 billion of revenue by 2024.

“Disney’s stock is not trading on earnings,” Rich Greenfield, an analyst at Lightshed Partners, said on Bloomberg Television. “This is about building excitement for Disney+.”

To contact the reporters on this story: Christopher Palmeri in Los Angeles at cpalmeri1@bloomberg.net;Nick Turner in Los Angeles at nturner7@bloomberg.net

To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net, Rob Golum

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